According to a small business administration study, over 28% of businesses go bankrupt due to problems with the financial structure of the company, and in many cases this could have been avoided.
Understanding your accounting reports is essential in order to stay on top of business so you can manage your finances and make informed decisions based on facts.
These tips will help keep your books current and your habits on point.
The necessity of good accounting practices for small businesses
- Not having adequate accounting procedures in place is akin to financial suicide and could easily cost over $100,000. The average time lost by having to fix and implement a system is 200 hours or more.
Poor Record Keeping Has Consequences
- Overlooked/unpaid expenses.
- Penalties incurred for filing taxes late.
- Mingling of assets (savings vs. checking, personal vs. business, etc.)
- Difficulty paying bills and employees.
Your Cash Flow
The Cash Flow Cycle – Cash Flow is a complex, vital process and requires knowledge of a company’s financial accounting systems general management of financial information, and proper inventory control.
A Basic Formula Covers –
- Accounts Payable – liabilities, money you owe
- Net Income (the bottom line) – revenues, expenses, net income
- Accounts Receivable – assets, money you receive
What Documentation Is Needed?
Every Business has financials that evaluate the health of their business. It’s important to take a look at your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement.
Reading The Statements
Profit and Loss Statement – Show net profit. Major components:
- Cost of goods sold
- Gross profit
- Net profit
There are two basic equations:
- Revenue – Cost of Goods Sold = Gross Profits
- Gross Profit – Expenses = Net Profit
Balance Sheet – It’s an overall picture of where your company stands. It includes:
- Assets – cash, stocks, accounts receivable, inventory, equipment, vehicles.
- Liabilities – credit card balances, taxes, accounts payable, accrued payroll, loan repayments.
- Equity – retained earnings, common stock
Cash Flow Statement – Analyzes cash generated and used for a specific period. It includes:
- Operating activities
- Investing activities
- Financing activities
- Supplemental information
Helps eliminate future earnings (typically 1-3 years) and informs your sales strategy.
Projected Annual Sales:
Total Revenue To-Date + Run Date x Remaining Number of Sales Periods
Projected Monthly Sales:
Actual Monthly Sales From The Same Time Last Year / Last Years Remaining Sales x Run Date x Remaining Number of Sales Periods
Company Revenue To-Date / Number Of Sales Periods x Info On If Product Services Have Changed
Financial tools used by financial analysts, investors, and bankers to determine your financial health include different types of standard business ratios:
- Total Debt to Total Assets – Shows your percentage of assets financed with debt.
- Pre-Tax Return on Net Worth – Shows the shareholder earnings before taxes.
- Pre-Tax Return on Assets – Shows how the company manages and allocates resources.
- Net profit margin
- Return on equity
- Accounts receivable turnover
- Assets to sales
- Current debt/Total assets
Finding Someone to Help (Like Me!)
If you’re spending too much time on your business’ financials or you don’t fully understand what you’re looking at, it may be time to hire a professional. It’s still vital to have basic accounting knowledge, but you’ll save yourself time and money by hiring someone who knows what they’re doing – again, like me.
Good accounting is crucial to the growth and longevity of your business. Over time, it will help you create and manage budgets, forecast future revenue, track expenses and look at the overall health of your business. Email me to help go over any of these statements or equations – I’m here to help!
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